Skip to content
Health, Sports & Psychology
  • Video
  • 15 mins
  • Level 1: Introductory

Using markets to address climate change

Updated Wednesday 15th September 2010

Tackling climate change requires significant engagement at the political level. Peter Newell discusses the Clean Development Mechanism, one of several market-led initiatives

Introducing the Clean Development Mechanism

Peter Newell is a professor in the School of International Development at University of East Anglia. Peter's work includes flexible market-based solutions to climate change, including the Clean Development Mechanism, as he explains here. Can they deliver benefits to poorer communities?


Copyright open university


My current work is mainly focused on the question of governance issues in carbon markets and particularly what’s called the clean development mechanism which is one of the flexible market based mechanisms which exists within the Kyoto Protocol.

Now one of the debates about carbon markets is whether you can make them work for poorer people so not only do they have to try and reduce greenhouse gas emissions but the idea is also that they should deliver benefits to poorer communities.  And for me that’s then a question of politics about who sets the priorities, about where investment should go, about who decides which projects, at which scale, using which technologies should be supported and making sure that the people that are meant to benefit from these projects play a part in making those sorts of decisions.  So governance is about participation, it’s about accountability and it’s about equitable distribution of the benefits that may or may not flow from carbon markets.

The clean development mechanism was created at the time of the Kyoto Protocol in 1997 and the push to create a mechanism like this came from North American governments, particularly the US, and there was growing interest in this in Europe as well, and the idea was that it’s cheaper to reduce a time of greenhouse gas emissions in poorer countries of the world than it is to do so in America or in Europe for example.  So this is the idea of offset, that you offset the growth of emissions in one part of the world by paying for those reductions to take place somewhere else, and the way it works basically is through designing and implementing projects.

So, for example, a project developer in India may say that they would like to create a wind farm but have neither the technological availability nor the finance to support it.  A polluting company in the UK, for example, which is currently unable or less willing to reduce its own emissions can pay for credits generated by this project, and the money that’s used to pay for these emissions reductions helps to pay for that technology and generate the finance that can establish a wind farm, for example, that might support energy access for several hundred villagers in a community in India for example.

So it’s a very complex process that’s evolved in terms of designing the product in the first place.  It has to be approved by the national government.  In this case in this scenario I’m describing it would be the Indian Government.  The UK Government where the investor is based would have to approve it, and then there’s a set of other bodies that are involved in verifying that the emissions claimed have actually been reduced and then they therefore make a recommendation to what’s called the CDM, the Clean Development Mechanism Executive Board that those emission reductions have been achieved and they should therefore be issued with what are called CERs, which is Certified Emission Reductions, which they could then pass on to the purchaser of the project that can then either claim them against their own emissions reductions obligations or they can sell them on, on the market, to someone else that needs them.

The key issues of carbon markets

Peter introduces the key issues with the Clean Development Mechanism, and carbon markets in general, and outlines the political aspects—how they are governed, and whether they are too soft or stingent.


Copyright open university


There’s a number of big issues with carbon markets and with the CDM in particular.  One is that in order to qualify for funding they have to show that they’re what’s called additional.  This means that they wouldn’t have happened without this finance coming through carbon markets.  So you have to show that you couldn’t have done it with existing technology, that you couldn’t have done it with existing levels of finance, that this project, this wind farm in the scenario I’ve been talking about wouldn’t have happened anyway, and there’s a bit dispute about that.  Lots of people say many of these projects would have gone ahead, anyway, they were perfectly financially viable, the technology was already in place, or in the case of some large hydro or small scale hydro for example that the construction, the building, the financing was there already and therefore these are not what’s called additional.

The second set of issues is around whether the communities that are meant to host these projects really benefit.  Firstly, whether they’re actually consulted in the first place about whether they want this project, and secondly whether it delivers the benefits that it claims, in terms of jobs, in terms of income, technology, sourcing of local materials; the whole range of things that are claimed as part of the project and the benefits that it brings often according to the critics at least fail to materialise.

The issue with carbon markets is that a lot of people believed that essentially you could just set up buyers and sellers in the market, and they would find the most efficient way of reducing emissions, but of course the whole process is deeply political.  When you’re talking about things like energy, you’re talking about things like waste, forests, agriculture, there’s actors who have very strong interests in how land is used and who has access to resources in terms of who gets a say in terms of how much they’re worth, so all of this makes the setting up of carbon markets very, very political and very conflictual often.  So politics run through all aspects of this.

Also, in terms of who gets the benefits from a project, how that money is distributed amongst a community that has contributed collectively to maintaining it and implementing it.  So all aspects really are political in terms of how it’s governed at the international level and there are concerns that the regulators there are too soft.  Of course according to many business people they’re too stringent in terms of how they regulate projects.  But there’s issues about who sits on these bodies, who they represent, whether there are conflicts of interest when people are both regulators and involved in carbon markets themselves and of course about who benefits.

Challenges facing carbon markets

Peter says that we need a legally binding agreement to create demand for credits purchased through carbon markets. How can governments be persuaded to lower their emissions overall, and only offset those which they cannot reduce through their own means?


Copyright open university


The CDM now faces a series of key challenges around its long term future and credibility and ability to show that it really reduces emissions.  So the fact that it’s part of the climate change negotiations means we really do need a new target, a legally binding agreement which creates demands for credits purchased through target markets, because if no one has an incentive to reduce their emissions then they’re less interested in purchasing offsets through the CDM.

So if you talk to people in the carbon market they’re keen to ensure that there’s a strong signal coming from the climate change negotiations that emissions do have to come down and so the governments are under pressure through a range of means to bring down their emissions.  And ideally first they would reduce their own emissions and only offset those emissions which they can’t achieve by their own means, so there has to be a strong signal in the first place.

Secondly, there needs to be much more stringent control around the projects that qualify for the CDM.  There have been numerous cases where projects have been double counted, where they’re not truly additional in the way I was mentioning previously.  In other words that they would have been funded and supported anyway and therefore the carbon finance wasn’t necessary.  It’s a nice thing for those project developers to have, but it certainly wasn’t what drove the change.  So much more stringency.  There’s big capacity issues as well.  Many governments at national level don’t have the capacity to process the number of applications that they receive for CDM projects of basic issues about resources, expertise, numbers of people.

The same is also true at the international level with the CDM Executive Board, which is basically made up of a number of people that meet every couple of months for a couple of days to process and approve these applications for CDM projects.  Many people are saying we need a full time professionalised board that can deal much more efficiently and much more quickly and in a more specialised manner the volume of applications that are going to come through the system.  Particularly if we’re talking about scaling up to what sometimes is called sectoral or policy based CDM which would hugely increase the number of credits coming through the system.

My sense overall is mixed.  I see grounds for optimism in the fact that there are so many interesting initiatives going on all around the world.  There’s city based efforts to reduce emissions.  Many businesses that were once very sceptical about climate change and actively opposed to it now have their own climate change programmes, their own voluntary emissions reductions targets, they report on their emissions.  In relation to civil society, in community based organisations, there’s a great deal of activity going on trying to generate interesting responses.  In the UK, we have the Transition Towns movement trying to sort of develop strategies for life without oil or a life which is at least less dependent on fossil fuels.

So both at government level and also in developing countries, you know, irrespective of the fact that those countries are not expected to lead in the same way that Europe or North America might have to.  Countries like India have a national solar mission, they have a national energy efficiency mission, they have their own emissions intensity targets.  You know, they see that they need climate proof development.  They need to find a model of development which enables them to tackle energy poverty but ultimately to bring down greenhouse gas emissions.  And that’s not letting countries off the hook in the north.  It’s just showing that a rising power like India has the power to do things for itself for its own people.

So there are grounds for optimism looking at what some governments are doing, at what some businesses are doing, at what some civil society organisations are doing, but if you look at the targets that we’ve set for ourselves, even within the Copenhagen Accord, trying to keep warming to two degrees below pre-industrial levels is going to be immensely difficult.  We’re not seeing serious shifts away from business as usual scenarios.  We continue to build more airports, more roads.  We’re not learning seriously yet to delink energy use and growth.

So on those grounds and looking at the climate impacts that people are suffering around the world with increasing intensity, when we look at the issue of finance that’s required to fund mitigation and to support adaptation efforts around the world, the sums of money that are out there at the moment are nowhere near what’s required.  So we’re talking about a huge step change that’s required politically and economically if we’re going to tackle this problem, and so in our broader picture there’s fewer grounds for optimism.  But I think we have to work with the tools we have, work with the positives and try and take those as far as we possibly can.

Become a Creative Climate diarist


For further information, take a look at our frequently asked questions which may give you the support you need.

Have a question?